Cost of Structural Repairs Not Linked to Covered Damage Do Not Fall Within Property Insurance Policy’s "Blanket Ordinance or Law Coverage Endorsement"

On April 21, 2016, the First Department issued a decision in St. George Tower v. Insurance Co. of Greater N.Y., 2016 NY Slip Op. 03100, holding that the cost of performing legally-mandated structural repairs is not covered by a property insurance policy's "Blanket Ordinance or Law Coverage Endorsement" unless those repairs are causally connected to covered damage to the property.

In St. George Tower, the plaintiff co-op suffered flooding that damaged the ceilings and floors in certain apartments. In the course of repairing that damage (which the co-op's insurance carrier acknowledged was covered by the building's property insurance policy), an architect discovered unrelated structural problems with the building that were required by law to be remediated. The co-op argued that those structural repairs were covered by the policy's "Blanket Ordinance or Law Coverage Endorsement," which provides coverage if the building sustains "direct physical damage that is covered under this policy and such damage results in the enforcement of [an] ordinance or law." New York County Commercial Division Justice Melvin Schweitzer granted summary judgment to the defendant insurer on that claim, holding that the endorsement was not triggered because there was no causal connection between the flooding and the pre-existing structure issues that were incidentally discovered in the course of remediating the flood damage. The First Department affirmed, explaining:

The Ordinance or Law endorsement cannot be triggered simply by the discovery, in the course of an inspection necessitated by a covered event, of structural problems that amount to code violations. That is so whether the discovered condition could have been discerned earlier, or where, as here, it could not have been discovered absent the covered damage.

If the rule were otherwise, even an inspector's discovery of code violations resulting from shoddy original construction, such as beams or pipes made of sub-par materials, would leave the insurance company liable for the necessary replacement of those materials any time the problem happened to be uncovered in the course of damage remediation. We therefore agree with the motion court; there must be some direct connection between the covered damage and the enforcement of the ordinance, and the necessity of a relationship between the damage and the code enforcement work is not satisfied by the fact that the covered work cannot be completed until the code-compliant repairs are performed. On this record, no evidence was presented that the code-compliant repairs resulted from, or were even related to, the water damage.

We are aware of decisions of other jurisdictions holding to the contrary, and decline to adopt their reasoning. In our view, it is not sufficient that the chain of events beginning with the covered event led to the inspection that uncovered otherwise unrelated code violations.

(Citations omitted.)

Also of note is the First Department's comment about the high bar under New York law for an insured to recover attorneys' fees in a coverage action. As we have noted in other posts (see here and here), New York does not recognize a cause of action against a carrier for bad faith claims handling. There is some authority suggesting that a policyholder may recover attorneys' fees in an extreme case where the insurance company engages in "such bad faith in denying coverage that no reasonable carrier would, under the given facts, be expected to assert it." Sukup v. State of New York, 19 N.Y.2d 519, 522 (1967). But that standard is hard to meet. The First Department underscored that point in St. George Tower, observing that "while our affirmance of the award of summary judgment to defendant conclusively establishes the propriety of the dismissal of plaintiff’s attorney's fees claims, we note that in any event, plaintiff's allegations that defendant's denial of coverage was not in good faith were insufficient to entitle plaintiff to reimbursement."